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Market Update May 2018

After the steady upward trend of 2017, this year has felt like a real roller coaster ride. We’ve been bouncing between the 2600-2800 level on that index for a while, with the exception of the quick run up in January, followed by the equally quick pullback in February. That’s a lot of movement to end up dead flat.

Investor results have varied wildly this year, though, depending on what stocks or sectors you own. It’s definitely not like 2017, when everything seemed to move higher, together. For example, the S&P technology sector is up about 3.5%, and the consumer discretionary (like shopping and restaurants) sector is even better, up 4.5%. On the flipside, sectors that are often associated with consistency are doing poorly, with the utilities sector down about 2.5% and the consumer staples sector (think soft drinks, tobacco, supermarket foods) is down an amazing 13%! This sort of sector performance is often associated with early and mid-economic phases of the cycle, not the end of expansion.

My March 27 update recommended technology, banks, and energy stocks over the interest rate-sensitive sectors like real estate, utilities, and staples. I still stand by that, as rising interest rates makes real estate, utilities, and staples less attractive compared to bonds. Generally speaking, the environment is favorable for stocks, especially the earnings outlook, which has the potential to be amazing. The S&P 500 member companies are on pace to grow earnings this quarter, on average, by more than 20%, and is expected to be the highest growth rate since 2010, according to FactSet’s Earnings Insight report.

I’ve heard talk of “peak earnings” recently, which is a new term for me. The concern seems to be that the current corporate earnings growth rate is unsustainable, setting the bar too high for future earnings, which will cause stock prices to fall. For sure, earnings growth is very impressive, and will be hard to beat in the future. But over the past 30 years or so, median S&P earnings growth is about 12% per year (according to the website multpl.com) so a slowdown in earnings growth to normal levels wouldn’t be catastrophic, in my opinion.

Interest rates are working against stock investors now, as money that might have been invested into stocks looks like it is being diverted to bonds. The yield on the 10-year US Treasury bond has risen from 2.03% on September 7, 2017, to 2.96% today (5/2/18), a nearly 50% rise in yield in only 8 months. Also, the US Dollar has gained a lot of strength against foreign currencies recently, which may be a headwind to corporate earnings in coming quarters. That may favor small companies that don’t traditionally derive a lot of revenue from overseas, so be on the lookout for outperformance from smallcap stocks. So, there are a few things on the negative side of the ledger, but, in my opinion, the environment for investing in stocks is good.

As always, these recommendations are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.

Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Scott Mitchell and not necessarily those of Raymond James.

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